Thursday, March 13, 2008
Watch For Additional Fed Intervention By Friday...
While the Fed's intervention yesterday was no surprise to us (see monday's blog), we are looking for additional intervention by friday as the USD appears to be on the verge of collapse. Watch for Fed to step in yet again and slash both the Fed Funds and Discount Rate by 50 bp by friday at the latest as an attempt to stem a global equity market meltdown provoked by an outright crash in the greenback. This however will do nothing more than evoke an even greater state of panic. As outlined in our monday blog, we expected any equity market rally provoked by Fed intervention to be short-lived and as such took it as an opportunity to add aggressively to short positions. It appears the final act of our Feb. 29th blog prediction is here.
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2 comments:
I have to disagree with you. If the Fed was going to make an inter meeting cut they would have already done it. Don't kid yourself Barnake see's the writing on the wall he can not cut rate any further without a major increase in inflation and US $ crash.
They now need to address inflation, as he can solve 3 problems with that mandate:
1) bring down prices of commodities helps fight inflation worldwide wins kudos from other Feds ECB, BOE, BOJ etc...
2) prop up $US with help of the above as this is true benefit for all. May even get support of OPEC nations who will benefit with US$ increase.
3) reduce the length of the recession, can't prevent it but can sure shorten it. Inflation is having the most impact on the guy on the street. Each 1$ increase in oil is taking $5 billion from economy. It is now all over the front pages....
We will see Tues...note the markets reacted better to liquidity input vs. rate reduction. Barnake will not fall for the rate reduction trap...
I partially agree with your assessment in that the Fed must absolutely address inflation now. Are they focused on it now? No. Their primary concern at this moment is instability within the banking system.
My personal opinion is that Fed Funds should go no lower than 2.25%-2.5%. So from 3% the Fed has 50-75bp left to go which Im almost sure they will do considering Fed Funds futures are pricing in a 94% chance of a 75bp by March 18th. If they do no cut at March 18th or it is anything less than 75bp, mark my words the equity markets will crater as the market has little faith that this treasury swap plan will do little more than prolong the inevitable. Are rate cuts the end all be all answer, no, but I agree with the market that Fed Funds does need to be 50-75bp lower than where it is.
My prediction of a cut just days before that is I agree a very bold prediction but it is based on a feeling of marked instability within the financial markets where I can absolutely invision a significant decline which would call the Fed to action ahead of March 18th. We will see what happens.
In terms of your assessment of the implications of soving the inflation problem now, I agree whole heartedly...but rates still need to come down from where they are.
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